Does Mycronic (STO:MYCR) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Mycronic AB (publ) (STO:MYCR) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Mycronic

What Is Mycronic's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Mycronic had kr152.0m of debt, an increase on kr72.0m, over one year. However, it does have kr1.75b in cash offsetting this, leading to net cash of kr1.59b.

A Look At Mycronic's Liabilities

The latest balance sheet data shows that Mycronic had liabilities of kr2.51b due within a year, and liabilities of kr521.0m falling due after that. On the other hand, it had cash of kr1.75b and kr1.25b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Mycronic's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the kr27.9b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Mycronic boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Mycronic grew its EBIT by 3.7% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Mycronic's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Mycronic has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Mycronic actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Mycronic's liabilities, but we can be reassured by the fact it has has net cash of kr1.59b. And it impressed us with free cash flow of kr1.3b, being 101% of its EBIT. So we don't think Mycronic's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Mycronic's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.